Battle for Chechen Oil

Thursday, 8 April, 2004

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Timur Aliev

Pro-Moscow Chechen leader Akhmad Kadyrov plans to found a new oil company that would give the devastated republic a greater share of its oil riches, while making him more financially and politically independent from his Russian backers.

Currently, money from sales of Chechen oil have gone to Russian giant Rosneft and its local subsidiary Grozneftegaz. According to Kadyrov, Chechnya sees few benefits.

"In fact, Grozneftegaz is failing to play even a small role in reconstruction of the republic. Today 70 per cent of taxes from oil sales stay in Moscow," Kadyrov said at a government session in Grozny last week. He complained that neither Rosneft nor Grozneftegaz have been putting any of this money back into Chechnya's badly damaged oil infrastructure or toward social needs.

Chechnya has only small reserves of oil, but it is of high quality. Grozny was also the site of one of the largest refineries in the Soviet Union, though much has been destroyed during Russia's two campaigns to crush independence forces in the last 10 years.

Oil extraction in Chechnya dates back a century, with production growing in the Sixties to a record of 21 million tonnes in 1971. After rapid decline through the Eighties, production stabilised at 4-5 million tonnes by the Nineties, just as the independence movement led by Jokhar Dudayev gathered pace.

Despite huge damage to infrastructure and the rerouting of an important pipeline from the Caspian around Chechnya, oil remains lucrative - both on a large scale and for local residents running illegal, homemade refineries.

But the battle for control has also become the focus of a political feud between Kadyrov and his opponents in Moscow.

Some factions, in the Kremlin in particular, want Kadyrov to shoulder increasing responsibility for running Chechnya and combating the guerrilla forces. Others, such as the Russian finance and defence ministries are highly distrustful of Kadyrov, a former rebel commander who changed sides and became president last year in elections that independent observers denounced as fixed.

Kadyrov has ordered the general director of Grozneftegaz, Baudin Khamidov, to develop plans to establish a separate holding company that would be independent of Rosneft.

"Chechnya will benefit from this special status. We are a destroyed republic," Zaindi Durdiev, one of the authors of the plan and a former Chechen oil minister, told IWPR in a telephone interview. "The money that Grozneftegaz earns is currently collected by the Russian energy ministry, then it goes to the finance ministry, and only then back to us."

At the same time, Durdiev is sceptical that the Chechen oil firm will actually be created. "It is unlikely to happen, as people at governmental level in Russia oppose it," he said.

Creating a new oil company might become possible once an accord on Chechnya's powers is ratified. The draft of the agreement proposed by Kadyrov envisages equal participation by Russian authorities and the local Chechen government in exploiting the republic's oil resources. Under the proposed accord, production and export quotas would also be agreed with the Chechen authorities.

Rosneft says it does not object. "If the state considers it necessary to create another oil company there, let it do it," spokesman Dmitrii Panteleev said in a telephone interview.

He rejected accusations that Rosneft had failed to provide funding for social spending or the reconstruction of the oil industry. Panteleev said the company invested more than 3.5 billion roubles in Chechnya last year. More than 550 million roubles for economic and social assistance were transferred to the energy ministry, he said.

"Our activity in Chechnya is fully regulated by the state... and it is not commercial in nature. The government commissioned us to create Grozneftegaz to operate there and reinvest part of the funds to maintain or increase oil production," he said.

Grozneftegaz says it spent some 125.5 million roubles last year in the social sphere and a further 38.3 million roubles in charity, as well as considerable investments in gas, water and electricity infrastructure.

Rashid Yunusov from the Chechen finance ministry believes Kadyrov is also at the heart of a complex legal dispute between Rosneft and Grozneftegaz with another company, Chechenneftekhimprom.

In 2002, state-owned Chechen oil and gas businesses were meant to be transferred to Grozneftegaz. Instead, the assets were transferred to a newly created firm, Chechenneftekhimprom.

Then early this year, creditors of Chechenneftekhimprom, led by a company called Kreking, moved to secure payment. "They seized the property which Grozneftegaz was renting and some auctions were even held to transfer this effectively state-owned property into private hands," said Panteleev.

Kreking, said Yunusov, is backed by the Chechen president. "The most important thing for Kadyrov is to manage to create a Chechen oil company before privatisation starts in Chechnya," he said. Rosneft refused to comment on Kreking's aims.

Vladimir Pribylovsky, an analyst from the Panorama think-tank, said the heart of the dispute is political. "This is not an economic issue for the Kremlin. It is a question of whether the Kremlin should butter Kadyrov up with the oil, or whether he'll do without it."

The outcome could depend on which of the Kremlin clans gets an upper hand.

Two deputy assistants to President Vladimir Putin - Viktor Ivanov and Igor Sechin - "dislike Kadyrov for ideological 'state-related' reasons," said Pribylovsky. Both men are associated with the "siloviki", a group of political figures with military or KGB backgrounds.

Protecting Kadyrov, on the other hand, are members of the Yeltsin-era grouping known as the "family". Their pragmatic viewpoint, Pribylovski said, is that paying off Kadyrov with oil is an acceptable price for his loyalty to Russia and willingness to repress the rebels.

Timur Aliev is IWPR's coordinator in Chechnya.